Aviva 2013 Annual Report Download - page 252

Aviva plc
Annual report and accounts 2013
250
Financial and operating performance continued
During 2013, sterling weakened slightly against the euro and
strengthened against the Canadian dollar and US dollar. This
resulted in a foreign currency loss in other comprehensive
income from continuing operations of £35 million (2012: £200
million loss).
The impact of these fluctuations is limited to a significant
degree, however, by the fact that revenues, expenses, assets
and liabilities within our non-UK operations are generally
denominated in local currencies.
Acquisitions and disposals
Over the last two years we have completed and announced a
number of transactions, some of which have had a material
impact on our results. These transactions reflect our strategic
objectives of narrowing our focus to businesses where we can
produce attractive returns and exit businesses which we do not
consider central to our future growth.
Activity in 2013
On 8 January 2013, Aviva sold the remainder of its stake in
Delta Lloyd at €12.65 per share resulting in gross cash proceeds
of £353 million.
On 8 March 2013 the Group completed the disposal of its
Irish long-term business subsidiary, Ark Life to Allied Irish Bank
(AIB), and the acquisition of the non-controlling interest in
Aviva Life Holdings Ireland Limited from AIB for total cash
consideration of £117 million.
On 24 April 2013 the Group disposed of its entire holding
in its Spanish long-term business subsidiary, Aseval to Bankia for
cash consideration of £502 million.
In April the Group also completed the disposal of Aviva Zao,
its Russian long-term business subsidiary, for consideration of
£30 million, as well as completing the sale of its Malaysian joint
ventures for cash consideration of £153 million.
In May 2013 the Group sold its Romania Pensions business
to MetLife, Inc. for consideration of £5 million.
On 2 October 2013 the Group completed the disposal of its
US life and related internal fund management business to
Athene Holding Ltd receiving consideration of £1.4 billion.
In November 2013 the Group reached a conditional
agreement to sell its holding in Eurovita Assicurazioni S.p.A. to
JC Flowers, subject to regulatory approval. Eurovita has been
classified as held for sale.
Further details can be found in the section ‘IFRS Financial
statements – note 4 – Subsidiaries’.
Activity in 2012
In March Aviva’s distribution arrangement with Allied Irish Bank
(AIB) for long term business ceased and plans were put in place
for the bancassurance partnership with AIB to be unwound. A
strategic review commenced to determine the most effective
distribution channels going forward.
In July the Group sold 37.2 million shares in Delta Lloyd for
£313 million (net of transaction costs), reducing our holding to
19.8% of Delta Lloyd’s ordinary share capital, representing
18.6% of shareholder voting rights. As the Group no longer
had significant influence over Delta Lloyd, we ceased to
account for that company as an associate from 5 July 2012.
Subsequent to the 2012 year end we disposed of our entire
remaining holding.
In July, the Group sold its life businesses in the Czech
Republic, Hungary and Romania to MetLife Inc., for £37 million.
In December we sold our controlling 58.4% interest in
AVIVA NDB Holdings Lanka to a subsidiary of AIA group for a
consideration of £31 million.
On 18 December we reached an agreement with Bankia
S.A. to transfer our holding in Spanish subsidiary Aseval to
Bankia for £494 million. Due to the announced sale, Aseval was
classified as held for sale at the balance sheet date.
During 2012 the Group entered into negotiations to dispose of
Aviva Zao, its Russian long-term business subsidiary, and the
requirements for that business to be classified as held for sale
were met.
In December 2012 the Group announced the disposal of its
US life and related internal fund management business to
Athene Holding Ltd for £1.0 billion, including the shareholder
loan. As a result of this announcement the results of the
business for 2012 and comparative periods were classified as a
discontinued operation and it was held for sale at the balance
sheet date.
Further details can be found in the section ‘IFRS Financial
statements – note 4 – Subsidiaries’.
Basis of earnings by line of business
Our earnings originate from three main lines of business: our
long-term insurance and savings business, which includes a
range of life insurance and savings products; general insurance
and health, which focuses on personal and commercial lines;
and fund management, which manages funds on behalf of our
long-term insurance and general insurance businesses, external
institutions, pension funds and retail clients. These lines of
business are present in our various operating segments to a
greater or lesser extent.
In the UK, we have major long-term insurance and savings
businesses and general insurance businesses; in Europe we have
long-term insurance and savings businesses in all countries in
which we operate, large general insurance businesses in France,
Ireland and Italy, and smaller general insurance operations in
several other countries; in Canada we have a leading general
insurance operation; in Asia we predominantly have long-term
insurance and savings businesses. Our fund management
businesses operate across Europe, Asia, North America and
the UK.
Long-term insurance and savings business
For most of our life insurance businesses, such as those in the
UK and France, operating earnings are generated principally
from our in-force books of business. Our in-force books consist
of business written in prior years and on which we continue to
generate profits for shareholders. Under IFRS, certain costs
incurred in acquiring new business must be expensed, thereby
typically giving rise to a loss in the period of acquisition,
although the degree of this effect will depend on the pricing
structure of product offerings. In certain higher growth markets,
current year sales have a more significant effect on current year
operating earnings.
UK with-profits business
With-profits products are designed to pay policyholders
smoother investment returns through a combination of regular
bonuses and final bonuses. Shareholders’ profit emerges from
this business in direct proportion to policyholder bonuses, as
shareholders receive up to one-ninth of the value of each year’s
bonus declaration to policyholders. Accordingly, the smoothing
inherent in the bonus declarations provides for relatively stable
annual shareholders’ profit from this business. The most
significant factors that influence the determination of bonus
rates are the return on the investments of the with-profits funds
and expectations about future investment returns. Actual and
expected investment returns are affected by, among other
factors, the mix of investments supporting the with-profits fund,
which in turn is influenced by the extent of the inherited estate
within the with-profits fund.
The annual excess of premiums and investment return over
operating expenses, benefit provisions and claims payments
within our with-profits funds that are not distributed as bonuses
and related shareholders’ profit is transferred from the income
statement to the unallocated divisible surplus. Conversely, if a
shortfall arises one year, for example because of insufficient